Auditing Chapter 17
A client changed the depreciable life of certain assets from 10 years to 12 years. The auditor concurs with the change.
1. Unmodified—standard.
A client changed the method it uses to calculate postemployment benefits from one acceptable method to another. The effect of the change is immaterial this year but is expected to be material in the future.
1. Unmodified—standard.
A client changed the salvage value of certain assets from 5 percent to 10 percent of original cost. The auditor concurs with the change.
1. Unmodified—standard.
A client is issuing two years of comparative financial statements. The first year was audited by another auditor who is being asked to reissue her audit report. (Reply as to the successor auditors' report.)
1. Unmodified—standard.
A client uses the specific identification method of accounting for valuable items in inventory, and LIFO for less valuable items. The auditor concurs that this is a reasonable practice.
1. Unmodified—standard.
A company has not followed generally accepted accounting principles in the recording of its leases. The amounts involved are immaterial.
1. Unmodified—standard.
An auditor reporting on group financial statements decides to take responsibility for the work of a component auditor who audited a 70 percent owned subsidiary and issued an unmodified opinion. The total assets and revenues of the subsidiary are 5 percent and 8 percent, respectively, of the total assets and revenues of the entity being audited.
1. Unmodified—standard.
An auditor was hired after year-end and was unable to observe the counting of the year-end inventory. However, she was able to apply other procedures and determined that ending inventory and related information are properly stated.
1. Unmodified—standard.
A client is issuing two years of comparative financial statements. The first year was audited by another auditor who is not being asked to reissue her audit report. (Reply as to the successor auditors' report.)
10. Other.
An auditor reporting on group financial statements decides not to take responsibility for the work of a component auditor who audited a 70 percent owned subsidiary and issued an unqualified opinion. The total assets and revenues of the subsidiary are 5 percent and 8 percent, respectively, of the total assets and revenues of the entity being audited.
10. Other.
Due to recurring operating losses and working capital deficiencies, an auditor has substantial doubt about an entity's ability to continue as a going concern for a reasonable period of time. The notes to the financial statements adequately disclose the situation. The auditor has decided not to issue a disclaimer of opinion.
2. Unmodified with an emphasis-of-matter paragraph.
An auditor discovered that a client made illegal political payoffs to a candidate for president of the United States. The auditor was unable to determine the amounts associated with the payoffs because of the client's inadequate record-retention policies. Although there is no likelihood that the financial statements are pervasively misstated, they may be materially misstated. The client refuses to disclose the payoffs in a note to the financial statements.
3. Qualified.
The scope of the auditor's examination is restricted and the auditor is NOT ABLE to effectively apply other procedures.
A qualified opinion/ A disclaimer opinion.
Inventory is valued at sales prices which the auditors find, although reasonable, different from the lower of cost or market valuation system.
A qualified opinion/ An adverse opinion.
Substantial doubt about the client's ability to continue as a going concern exist. This substantial doubt is not properly disclosed in the financial statement notes. The auditor will not issue a disclaimer of opinion.
A qualified opinion/ An adverse opinion.
The financial statements contain a departure from generally accepted accounting principles.
A qualified opinion/ An adverse opinion.
The client has changed from LIFO to FIFO for inventory valuation purposes; the auditors do not concur with this change. The effect is considered material and pervasive.
Adverse
The company changed the lives of some of its fixed assets—the auditor finds the new lives reasonable.
An unmodified opinion, standard form/ An unmodified opinion, standard form.
Audit reports issued under GAAS ordinarily are signed with the name of the __________.
CPA firm
The Basis for Opinion section should begin with a statement that the financial statements are the responsibility of management. (Correct or Incorrect)
Correct
The change in accounting principles should not be referred to in the opinion paragraph—delete that sentence. (Correct or Incorrect)
Correct
The point should say communicated to the audit committee. (Correct or Incorrect)
Correct
The report also must be addressed to the board of directors. (Correct or Incorrect)
Correct
The report should be dated as of February 12, the date on which sufficient appropriate audit evidence was obtained. (Correct or Incorrect)
Correct
5. "As discussed in Note 4 to the financial statements, in 20X5 the entity elected to change the estimated life of a number of its plant assets. We concur with this change."
Delete entire paragraph.
4. "and subject to the accounting change described in the Emphasis of Matter paragraph"
Delete the text.
Client-imposed restrictions significantly limit the scope of the auditors' procedures, and they are unable to obtain sufficient appropriate audit evidence. The possible effects on the financial statements of undetected misstatements, if any, could be both material and pervasive.
Disclaimer.
Draves Company owns substantial properties that have appreciated significantly in value since the date of purchase. The properties were appraised and are reported in the balance sheet at the appraised values (which materially exceed costs) with related disclosures. The CPAs believe that the appraised values reported in the balance sheet reasonably estimate the assets' current values.
Either qualified or adverse
The Change in Accounting Principles paragraph should include the dollar effect of the change. (Correct or Incorrect)
Incorrect
A departure from GAAP
No/Yes
7. "February 6, 20X6."
Replace with "January 31, 20X6, except for Note 7, as to which the date is February 2, 20X6."
3. "Basis for Qualified Opinion: The Company has excluded from property and debt in the accompanying balance sheets certain lease obligations that, in our opinion, should be capitalized in order to conform with accounting principles generally accepted in the United States of America. If these lease obligations were capitalized, property would be increased by $3,500,000, long-term debt by $3,500,000, and retained earnings by $500,000 as of December 31, 20X5. Additionally, net income would be increased by $500,000 and earnings per share would be increased by $1.12 for the year then ended."
Retain the original text.
The auditors decide not to make reference to the report of a component auditor that audited a portion of group financial statements.
Unmodified—standard.
A change from deferring and amortizing preproduction costs to recording such costs as an expense when incurred because future benefits of the costs have become doubtful. The new accounting method was adopted in recognition of the change in estimated future benefits. (Yes or No)
Yes
Correction of a mathematical error in inventory pricing made in a prior period. (Yes or No)
Yes
A change to an accounting principle that the auditor considers desirable.
Yes/ Yes
Emphasis of a matter
Yes/ Yes
Reliance upon component auditors
Yes/No
The auditors issue a qualified opinion or a(n) __________ opinion, if they consider the disclosure in the client's financial statements to be inadequate.
adverse
When financial statements contain a material departure from generally accepted accounting principles, the auditors qualify their opinion, or they issue a(n) __________ opinion depending on the materiality of the departure.
adverse
All nonpublic company audit reports that are qualified should contain a(n) __________ explaining the details of the qualification.
basis for modification paragraph (or basis for qualified opinion paragraph)
If a scope limitation is so severe that a qualified opinion is inappropriate, the auditors should issue a(n) __________.
disclaimer of opinion
The auditor's responsibility relating to a GAAS audit is for __________ on the financial statements.
expressing an opinion
Responsibility for the preparation and fair presentation of the financial statements rests with the __________.
management
If the auditors have examined the prior year's financial statements presented for comparative purposes, they should __________ their opinion for any new information.
update
A scope limitation
No/Yes
6. "Adams, Barnes & Co."
Retain the original text.
An entity changes its depreciation method for production equipment from straight-line to a units-of-production method based on hours of utilization. The auditor concurs with the change, although it has a material effect on the comparability of the entity's financial statements. (Type of Opinions/ Report Alteration)
Unmodified/ Add an emphasis-of-matter paragraph—after opinion paragraph.
Due to recurring operating losses and working capital deficiencies, an auditor has substantial doubt about an entity's ability to continue as a going concern for a reasonable period of time. However, the financial statement disclosures concerning these matters are adequate. The auditor has decided not to issue a disclaimer of opinion. (Type of Opinions/ Report Alteration)
Unmodified/ Add an emphasis-of-matter paragraph—after opinion paragraph.
When a nonpublic client elects to change accounting principles from one acceptable principle to another acceptable principle and the auditors agree the change is desirable, they should issue a report with a(n) __________ opinion.
unmodified
A(n) __________ opinion is an opinion that the financial statements of a public company fairly present financial position, results of operations, and cash flows, in conformity with generally accepted accounting principles.
unqualified
In auditing the long-term investments account of a new client, an auditor finds that a large contingent liability exists that is material to the consolidated company. It is probable that this contingent liability will be resolved with a material loss in the future, but the amount is not estimable. Although no adjusting entry has been made, the client has provided a note to the financial statements that describes the matter in detail.
1. Unmodified—standard.
A client changed its depreciation method for production equipment from the straight-line method to the units-of-production method based on hours of utilization. The auditor concurs with the change.
2. Unmodified with an emphasis-of-matter paragraph.
A client's financial statements follow GAAP, but the auditor wishes to emphasize in his audit report a significant related party transaction that is adequately described in the notes to the financial statements.
2. Unmodified with an emphasis-of-matter paragraph.
A client changed the depreciable life of certain assets from 10 years to 12 years. The auditor does not concur with the change. Confined to fixed assets and accumulated depreciation, the misstatements involved are not considered pervasive.
3. Qualified.
Due to recurring operating losses and working capital deficiencies, an auditor has substantial doubt about an entity's ability to continue as a going concern for a reasonable period of time. The notes to the financial statements do not adequately disclose the substantial doubt situation, and the auditor believes the omission fundamentally affects the users' understanding of the financial statements.
4. Adverse.
A client changed its depreciation method for production equipment from the straight-line to a units-of-production method based on hours of utilization. The auditor does not concur with the change.
7. Qualified or adverse.
A client's financial statements follow GAAP except that they do not include a note on a significant related party transaction.
7. Qualified or adverse.
A company has not followed generally accepted accounting principles in the recording of its leases.
7. Qualified or adverse.
A company valued its inventory at current replacement cost. Although the auditor believes that the inventory costs do approximate replacement costs, these costs do not approximate any GAAP inventory valuation method.
7. Qualified or adverse.
In auditing the long-term investments account of a new client, an auditor finds that a large contingent liability exists that is material to the consolidated company. It is probable that this contingent liability will be resolved with a material loss in the future, and this amount is reasonably estimable as $2,000,000. Although no adjusting entry has been made, the client has provided a note to the financial statements that describes the matter in detail and includes the $2,000,000 estimate in that note.
7. Qualified or adverse.
An auditor discovered that a client made illegal political payoffs to a candidate for president of the United States. The auditor was unable to determine the amounts associated with the payoffs because of the client's inadequate record-retention policies. The client has added a note to the financial statements to describe the illegal payments and has stated that the amounts of the payments are not determinable.
8. Qualified or disclaimer.
An auditor was hired after year-end and was unable to observe the counting of the year-end inventory. She is unable to apply other procedures to determine whether ending inventory and related information are properly stated.
8. Qualified or disclaimer.
The financial statements reflect a change from one generally accounting principles to another generally accepted accounting principle. The auditor does not consider the new principle preferable to the previous one.
A qualified opinion/ An adverse opinion.
Substantial doubt about the client's ability to continue as a going concern exist. This substantial doubt is properly disclosed in the financial statement notes. The auditor will not issue a disclaimer of opinion.
An unmodified opinion with an additional paragraph (e.g., emphasis of a matter paragraph)./ An unmodified opinion with an additional paragraph (e.g., emphasis of a matter paragraph).
The auditors wish to emphasize in the report a subsequent event described in the notes to the financial statements.
An unmodified opinion with an additional paragraph (e.g., emphasis of a matter paragraph)./ An unmodified opinion with an additional paragraph (e.g., emphasis of a matter paragraph).
The financial statements reflect a change from one generally accounting principles to another generally accepted accounting principle. The auditor considers the new principle preferable to the previous one.
An unmodified opinion with an additional paragraph (e.g., emphasis of a matter paragraph)./ An unmodified opinion with an additional paragraph (e.g., emphasis of a matter paragraph).
The scope of the auditors' examination is restricted and the auditor is able effectively to apply other procedures.
An unmodified opinion, standard form/ An unmodified opinion, standard form.
During the audit of Eagle Company, the CPA firm has encountered a significant scope limitation relating to inventory record availability and is unable to obtain sufficient appropriate audit evidence in that area.
Either qualified or adverse
Slade Company has material investments in stocks of subsidiary companies. Stocks of the subsidiary companies are actively traded in the market. Management insists that all investments be carried at original costs, and the CPA firm is satisfied that the original costs are accurate. The CPA firm believes that the client will never ultimately realize a substantial portion of the investments because the market value is much lower than the cost; the client has fully disclosed the facts in notes to the financial statements.
Either qualified or adverse
The report's title is incorrect as it should not include the word "independent." (Correct or Incorrect)
Incorrect
The sentence should state generally accepted auditing standards of the PCAOB. (Correct or Incorrect)
Incorrect
This disclosure also must include the name of the engagement partner. (Correct or Incorrect)
Incorrect
When critical matters exist, the two related paragraphs (this and the following paragraph) should immediately follow the opinion paragraph. (Correct or Incorrect)
Incorrect
A change in the estimated service lives of previously recorded plant assets based on newly acquired information. (Yes or No)
No
A change to including the employer's share of FICA taxes as "Retirement benefits" on the income statement. This information was previously included with "Other taxes." (Yes or No)
No
London Company has material investments in stocks of subsidiary companies. Stocks of the subsidiary companies are not actively traded in the market, and the CPA firm's engagement does not extend to any subsidiary company. The CPA firm is able to determine that all investments are carried at original cost but has no real idea of market value. Although the difference between cost and market could be material, it could not have a pervasive effect on the overall financial statements.
Qualified
The auditors believe that the financial statements have been presented in conformity with generally accepted accounting principles in all respects, except that a loss contingency that should be disclosed through a note to the financial statements is not included. While they consider this a material omission, they do not believe that it pervasively affects the financial statements.
Qualified
In auditing the long-term investments account, an auditor is unable to obtain audited financial statements for an investee located in a foreign country. The auditor concludes that sufficient appropriate audit evidence regarding this investment cannot be obtained. (Type of Opinions/ Report Alteration)
Qualified or disclaimer/ Add a basis-for-modification paragraph—prior to opinion paragraph.
An entity discloses certain lease obligations in the notes to the financial statements. The auditor believes that the failure to capitalize these leases is a departure from generally accepted accounting principles and, although the possible effects on the financial statements of the misstatements are material, they could not be pervasive. (Type of Opinions/ Report Alteration)
Qualified/ Add a basis-for-modification paragraph—prior to opinion paragraph.
2. "Sam Best, President"
Replace with "Board of Directors of Keystone"
1. "Certified Public Accountant's Report"
Replace with "Independent Auditor's Report"
A group auditor decides to take responsibility for the work of a component CPA who audited a wholly owned subsidiary of the entity and issued an unmodified opinion. The total assets and revenues of the subsidiary represent 17 percent and 18 percent, respectively, of the total assets and revenues of the entity being audited. (Type of Opinions/ Report Alteration)
Unmodified/Issue standard report without alteration.
Bowles Company is engaged in a hazardous trade and has obtained insurance coverage related to the hazard. Although the likelihood is remote, a material portion of the company's assets could be destroyed by a serious accident.
Unmodified—standard report
The client has changed from LIFO to FIFO for inventory valuation purposes; the auditors concur with this change. The effect is considered material to the financial statements, although inventory is not a large part of total assets.
Unmodified—with an emphasis-of-matter paragraph.
A change from direct costing to full absorption costing for inventory valuation. (Yes or No)
Yes
A change from the FIFO method of inventory pricing to the LIFO method of inventory pricing. (Yes or No)
Yes
A change from the completed-contract method to the percentage-of-completion method of accounting for long-term construction contracts. (Yes or No)
Yes